Investment 101 - The Building Blocks PDF

Investment 101 The Building Blocks Gabriel Odediran Chief Execution Officer January 2024 Disclaimer All Rights Reserved Copyright © 2024 One Horizon Capital Limited The content in this presentation should not be considered as a recommendation to buy or sell a security. All information is inten...

Investment 101 The Building Blocks Gabriel Odediran Chief Execution Officer January 2024 Disclaimer All Rights Reserved Copyright © 2024 One Horizon Capital Limited The content in this presentation should not be considered as a recommendation to buy or sell a security. All information is intended for educational purposes only and in no way should be considered investment advice. All financial securities involve risk and are not suitable for all investors. All rights and obligations of the different investment securities should be fully understood by individual investors before entering any trade. Contents - Day 1 1 Capital Markets 2 Company’s Capital Structure 3 Valuation Frameworks 4 Universe of Securities and Financial Instruments 5 Investment Strategies 6 OHCs Investment Process and Due Diligence Framework 7 Conclusion Contents - Day 2 1 Capital Markets 2 Company’s Capital Structure 3 Valuation Frameworks 4 Universe of Securities and Financial Instruments 5 Investment Strategies 6 OHCs Investment Process and Due Diligence Framework 7 Conclusion Contents - Day 3 1 Capital Markets 2 Company’s Capital Structure 3 Valuation Frameworks 4 Universe of Securities and Financial Instruments 5 Investment Strategies 6 OHCs Investment Process and Due Diligence Framework 7 Conclusion  1 2 3 4 5 6 7 Capital Markets What are Capital Markets? Capital markets are where individuals and institutions trade financial assets such as stocks, bonds, and commodities. They provide a platform for companies to raise capital by selling securities and help investors earn returns on their investments. Functions of Capital Markets Capital Allocation: Facilitate the flow of savings into productive investments, enabling economic growth and innovation. Risk Management: Offer a range of financial instruments to hedge against and manage risks, such as options and futures contracts. Price Discovery: Determine fair prices for securities through the interaction of buyers and sellers in an open market. Types of Financial Instruments Traded Stocks (Equities): Represent ownership in a company. Shareholders have voting rights and may receive dividends. Bonds (Fixed Income): Debt securities where investors loan money to governments or corporations in exchange for periodic interest payments. Derivatives: Financial contracts whose value derives from an underlying asset, such as options and futures contracts. Key Participants in Capital Markets Traders Investment Portfolio Regulators Bankers Managers Individuals or Oversight bodies institutions that buy Assist companies in Manage investment such as the Securities and sell securities in issuing securities and portfolios on behalf and Exchange the markets, aiming provide advisory of individuals or Commission (SEC) to profit from price services for mergers, institutions, making that enforce rules fluctuations. acquisitions, and decisions to optimize and protect investors' other financial returns and manage interests. transactions. risks. Primary and Secondary Markets 1 Primary Market Where new securities are issued and sold for the first time directly Secondary Market 2 by companies to raise capital. Where previously issued securities are bought and sold among investors without direct involvement of the issuing companies. Primary vs Secondary Markets Ownership Use of Proceeds Liquidity In the primary market, The primary market is The primary market is companies issue new where capital is raised usually not as liquid as securities to raise capital, and allocated to projects the secondary market, while investors purchase or investments. In the because securities are them directly from the secondary market, traded for the first time. issuer. In the secondary proceeds are exchanged The secondary market is market, investors buy between investors, and more liquid because and sell already existing no new capital is created. investors can buy and securities amongst sell securities more easily themselves, meaning that and frequently. the issuer receives no proceeds. Primary Market Coming to the market for the first time, issuance of new bonds and new shares (IPO) in exchange for capital Primary market transactions are conducted through Initial Public Offerings (IPOs) and involve underwriters that manage the process of issuing stocks or bonds. Institutions invest capital in entities that seek to expand and grow their businesses but sometimes for refinancing or consolidation, while the corporations issue debt or equity to the institutions in return for their capital investment. Some examples of primary market transactions include governments issuing bonds to finance public projects. 4 Key Players Corporates/ Governments / Special Entities - Need capital to grow, consolidate and run their business Institutions ”Buyside” - Fund Managers, Institutional and Retail Investors looking for a return Investment banks “Sell Side” – Intermediary hired to facilitate deals between corporations and institutions What skill sets are needed here? Financial Modelling and Valuation Analysis Public accounting firms – Roles can include financial reporting, auditing financial statements, taxes, consulting on accounting systems, M&A advisory, and capital raising Secondary Market Where investors buy and sell securities from other investors without involving issuing house What is the importance of a Secondary Market Measures economic conditions of a country Provides comparison benchmark for valuation Establishes fair value through supply and demand while creating liquidity The secondary market allows players to enter and exit securities easily, making the market liquid. Some examples of secondary market transactions include investors buying and selling shares of Apple stock on the Nasdaq or selling corporate bonds on the over- the-counter market. Buyers and Sellers – Fund managers or any investors who wish to purchase securities or debts will have to locate a seller. Transactions are facilitated through a central marketplace, including a stock exchange or Over The Counter (OTC). Investment Banks – Expedite sale and trading of issued debts and equities between buyers and sellers in the secondary market. Also provide research coverage on each issues upside potential, downside risk, and rationale to help buyers and sellers make a judgment. Moreover, investment banks sell and trade securities on behalf of the clients to maximize their profits. Secondary Market – Exchanges and OTC Market Exchanges - Securities traded through a centralized place with no direct contact between seller and buyer. Examples are the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE). There is no counterparty risk; the exchange is the guarantor. Exchange-traded markets are a safe place for investors to trade securities due to regulatory oversight. However, securities traded on the exchange-traded market face a higher transaction cost due to exchange fees and commissions Over-the-counter (OTC) - No centralized place where securities are traded. The market is made up of participants trading among themselves in a noncentralized place. An example is the foreign exchange market (FOREX) How do Investors Benefit? 1 Price Discovery 2 Liquidity Investors can track price Investors can sell securities in movements of securities in the the secondary markets to secondary market instead of obtain liquidity without having relying on valuations set by to wait for maturity or sellers in the primary market. repayment. 3 Diversification Investors can diversify their portfolio across a variety of securities offered in the secondary market, including stocks, bonds, and exchange- traded funds (ETFs). Regulatory Of Capital Markets Regulatory Bodies Responsibilities Securities and Exchange Commission (SEC) Protect investors, maintain fair markets, and facilitate capital formation. Financial Industry Regulatory Authority Regulate brokerage firms and ensure (FINRA) compliance with securities laws. Commodity Futures Trading Oversee derivatives markets and ensure Commission (CFTC) their integrity and transparency.  1 2 3 4 5 6 7 Company’s Capital Structure What is a Company’s Capital Structure The capital structure reflects all the firm’s equity and debt obligations. Shows each type of obligation as a slice of the stack. This stack is ranked by increasing risk, increasing cost, and decreasing priority in a liquidation event (e.g., bankruptcy). Careful balance between equity & debt that a business uses to finance its assets, day-to-day operations, and future growth Influences – Firm’s risk profile – Ease and cost of funding – Return investors and lenders expect – Some insulation from both microeconomic business decisions and macroeconomic downturns Capital Structure Components Senior Debt – Highest repayment priority (lower interest and less restrictive debt covenants) Subordinated Debt – Ranks lower on claim on assets but is offered higher interest payments. Mezzanine Debt - A class of subordinated debt that blends equity and debt features. Lends at higher rates and usually reserve right to trade some debt for equity Hybrid Financing - Blends equity and debt features. Hybrid securities are bought and sold through brokers on an exchange. Hybrid financing can come with fixed or floating returns and can pay interest or dividends. Convertible Debt – Most common hybrid financing, comes as bond that can be converted to equity Convertible Equity – Type of hybrid financing, takes form of convertible preferred shares/equity that can be converted to common equity. Preferred Equity –Has both features of debt and equity, in the form of fixed dividends (Debt) and future earnings potential (equity). No voting rights Common Equity – Most junior form of capital, highest risk but also highest return potential  1 2 3 4 5 6 7 Valuation Frameworks Importance Of Valuation The world of finance is full of complexities and understanding the intricacies of financial analysis and valuation frameworks is crucial for investors. Let's begin by exploring the fundamentals and why they matter. By utilizing a structured framework, we can accurately assess the financial health and potential value of a company, enabling informed investment decisions. The market's perception of a company's value directly influences investor sentiment and prices of their issued securities. Below are some key metrics that help form this perception: 1 Profitability Ratios 2 Liquidity Ratios Analyze financial performance Evaluate a company's ability to meet indicators such as return on short-term obligations by examining investment and profit margin to metrics like current ratio and quick assess company profitability. ratio. 3 Debt Ratios 4 Market Ratios Assess a company's leverage and Measure a company's valuation by solvency by analyzing metrics like examining factors such as price-to- debt-to-equity ratio and interest earnings ratio and price-to-sales coverage ratio. ratio. Valuation Techniques Discounted Cash Comparable Asset-Based Market Multiple Flow Analysis Company Valuation Analysis Analysis Evaluate the Determine the Assess the value of intrinsic value of Compare a value of a a company by an investment by company's company based on comparing its key estimating future financial metrics its tangible and financial ratios to cash flows and and valuation intangible assets, industry discounting them multiples to similar including property, benchmarks and to present value. companies in the equipment, and market averages. industry for intellectual relative valuation. property. Business Valuations Enterprise and Equity Value Enterprise value is the sum of market capitalization and market value of debt, net of cash Equity value is simply market capitalization The first is used for EV/EBITDA, EV/Sales, and similar multiples The second, on the other hand, is used for stock price multiples Importance of Using a Structured Framework Adopting a structured approach offers numerous advantages, such as minimizing biases, providing transparency, and enhancing prediction accuracy. The use of a comprehensive financial analysis and valuation framework plays a significant role in shaping investment strategies and optimizing portfolio performance. Financial analysis and valuation frameworks are indispensable tools for investors seeking to navigate the complex world of finance. Armed with these insights, you can make well-informed and profitable investment decisions.  1 2 3 4 5 6 7 Universe of Securities and Financial Instruments Securities are financial instruments that represent a form of ownership, or a debt owed. They can be categorized into various types, each with its unique features and advantages. Money Markets/Cash Equivalent Diverse Investment Liquid and Accessible Interest Rate Exposure Options Cash equivalent Investors in money markets Money markets offer a instruments, including are exposed to fluctuations range of short-term, low- certificates of deposit and in interest rates, impacting risk securities, such as money market accounts, the overall yield of their Treasury bills and provide easy access to investments. commercial paper, funds while maintaining a providing liquidity and high level of safety. stability to investors. Bonds Fixed Income Securities Diverse Types Risk and Returns Bonds represent debt From government bonds Bond prices are obligations issued by to corporate bonds, the influenced by interest governments, bond market offers a rates and credit ratings, municipalities, or variety of options affecting the risk-return corporations. They offer a catering to different risk tradeoff for investors. fixed rate of interest over appetites and investment a specified period. objectives. Equities 1 Ownership in 2 Dividend Income 3 Market Volatility Companies Stockholders may Equity investments Equities represent receive dividends as are subject to market ownership in a a share in the fluctuations, company and company's profits, influenced by factors provide investors offering a source of such as economic with the potential for regular income in conditions, industry capital appreciation addition to potential trends, and company through the capital gains. performance. company's growth and profitability. Commodities Diverse Asset Classes Supply and Demand Dynamics Commodities encompass a wide range of Commodity prices are influenced by tangible assets, including energy, metals, and global supply and demand, geopolitical agricultural products, providing portfolio factors, weather conditions, and diversification. technological advancements. Futures Trading Investors can participate in commodities through futures contracts, allowing them to speculate on price movements and manage risk exposure.  Derivatives 1 Options An option is a contract between two parties that gives the buyer the right (but not the Risk Management Tools Swaps 2 obligation) to buy or sell an underlying asset at Derivatives enable investors A swap is an agreement between two a specific price on or before a certain date. to manage risk exposure and parties to exchange cash flows based Options can help manage risk. customize their investment on different financial instruments. strategies based on their Swaps can be used to hedge risk or views of market movements speculate on interest rates or 3 Futures and price fluctuations. currency exchange rates. A futures contract is an agreement between two parties to buy or sell an underlying asset at a specific price on a specific date in the future. Futures can help manage risk and provide liquidity in markets.  FX (Foreign Exchange) 1 Market Dynamics The forex market operates 24/5, with trillions of dollars exchanged daily, making it the largest Currency Pairs 2 and most liquid financial market globally. FX trading involves the simultaneous buying of one currency and selling of another, with exchange rates impacted by economic indicators and geopolitical events. 3 Risk Management Foreign exchange derivatives, such as forwards and options, enable market participants to mitigate currency risk related to international transactions. Hybrid Securities 1 Combination of Features 2 Risk and Return Profile These instruments provide varying levels Hybrid securities combine elements of of risk and return, appealing to investors both debt and equity, offering investors a seeking a balance between income mix of fixed income characteristics and generation and growth potential. potential for capital appreciation. 3 Callable and Convertible Features Some hybrid securities may have call provisions or the ability to convert into shares, providing flexibility and customization for investors. Managed Investment Schemes Mutual Funds A mutual fund is a type of investment vehicle that pools money from many investors to purchase a collection of stocks, bonds, or other securities. Mutual funds are managed by professional fund managers, who make investment decisions on behalf of their clients. Exchange-Traded Funds (ETFs) ETFs are like mutual funds, but they trade on stock exchanges like individual stocks. They're typically designed to track the performance of a particular market index or industry sector. Hedge Funds Hedge funds are investment funds that can use more complex strategies than mutual funds and ETFs, such as leverage, short selling, and derivatives. They're typically only available to high- net-worth individuals and institutional investors. Real Estate Securities REITs and Mortgage- Income and Capital Market Dynamics and Backed Securities Appreciation Risks Real estate securities include Investors in real estate The performance of real investment options such as securities may receive regular estate securities is influenced Real Estate Investment Trusts income through rental by factors such as property (REITs) and mortgage-backed payments and benefit from market trends, interest rates, securities, offering exposure to potential capital appreciation and regulatory environments. the real estate market. from property value increases. Financial Engineering has led to creation of many different asset classes ❑ Securitization Market – Securitization is a financial arrangement that consists of issuing securities that are backed by a pool of assets, in most cases debt. The underlying assets are “transformed” into securities, hence the expression “securitization.” The holder of the security receives income from the products of the underlying assets, and this has given rise to the generic term ABS (Asset-Backed Securities). ❑ Here are a few examples of assets that can be securitized – Money Markets/Cash Equivalent – Residential mortgage loans; this category includes the infamous “subprime mortgages,” – Commercial mortgage loans – Bank loans to businesses – Commercial debt – Student loans (mainly in the US) DOES THIS LOOK FAMILIAR – Credit-card debt – Automobile loans Theoretically, any asset capable of producing cash flows can be securitized. More to come on the securitization market!!! Think DCF  1 2 3 4 5 6 7 Investment Strategies Investment Objectives and Risk Tolerance Understanding the different types of investment objectives and how they align with risk tolerance is crucial for successful investing. Investment objectives are specific financial goals that individuals or organizations aim to achieve through their investment activities. Risk tolerance refers to an individual's willingness to take on investment risk in exchange for potentially higher returns. Factors Influencing Risk Tolerance Aligning Investment Objectives with Risk Tolerance 1 Time Horizon 2 Financial Situation 1 Evaluate Investment Options Longer time horizons Stable financial Analyze investment options based on risk and potential returns. often allow for greater situations may result in risk tolerance. higher risk tolerance. 2 Set Realistic Goals Set goals that align with both investment objectives 3 Investment Knowledge 4 Emotional Stability and risk tolerance. A better understanding Emotionally stable of investments can individuals may 3 Create a Diversified Portfolio increase risk tolerance. tolerate higher risks. Diversify investments to manage risk while pursuing desired objectives. Investment Strategies – Passive vs Active Investing Passive investing involves buying and holding a diversified portfolio of securities aiming at mirroring a specific market index (e.g.; S&P500) Active investing involves making buying and selling decisions based on research and analysis, with the goal of outperforming the market. Passive investing offers lower fees, turnover, and potentially tax liabilities. Active investing allows more flexibility and potential for higher returns. Investment Styles Investment Styles (Cont.) 1 Growth Investing 4 Momentum Investing 5 Contrarian Investing Focusing on companies with high growth potential, Identify stocks that Takes opposite growth investors look for stocks that are expected to show positive price positions to prevailing experience above-average increases in revenue and earnings. movements and believe market trends. They the trend will continue anticipating a change 2 Value Investing in market sentiment. Value investors seek out stocks that are undervalued by the market. They look for companies with solid fundamentals that 6 Index Investing 7 Dividend Investing are trading at a discount. Aim to replicate the Focus on stocks that performance of a pay regular dividends, 3 Income Investing specific market index, which can provide a Income investors prioritize stocks or other investments that such as the NASDAQ stable income stream generate regular income, such as dividends or interest payments. Composite. over time. Introduction to Risk Management Understanding the relationship and importance between Risk-Return is a crucial aspect of investment strategy Tradeoff Higher-risk investments have the potential for higher returns, while lower-risk investments tend to offer lower returns. Understanding the balance between risk and return allows investors to make informed decisions aligned with their goals. Type of Risks in Investments Risk Management Strategies 1 Market Risk 2 Credit Risk 1 Identify Risk Market fluctuations The likelihood Thoroughly analyze potential risks associated with may cause the value of borrowers may default investments and take steps to monitor and evaluate them. investments to on principal or interest decrease. payments 2 Assess Risks Evaluate the probability of risks occurring and 3 Liquidity Risk 4 Operational Risk their potential impact on investments to prioritize risk mitigation strategies. Risk generated from Risks arising from difficulty in converting inadequate internal 3 Mitigate Risk investment to cash, processes, system leading to losses or failures, or human error Implement risk reduction measures, such as diversification, inability to meet that can negatively hedging, or using protective financial instruments. financial obligations. impact investments. Portfolio Management – Maximize Return Minimize Risk Modern Portfolio Theory: The Science of Diversification Efficient Frontier - Discover the optimal mix of assets that provides the highest expected return for a given level of risk. Capital Market Line - Explore the trade-off between risk and return by analyzing the risk-free rate, market portfolio, and investor preferences. Asset Correlation - Understand the relationship between different assets and how it affects portfolio diversification and risk management. Portfolio Construction: Building the Foundation Portfolio Performance Evaluation: Measure and Improve 1 Strategic Asset Allocation 2 Tactical Asset Allocation 1 Benchmarking Create a long-term Make short-term adjustments Compare portfolio returns against a benchmark index to assess its performance relative to the market. investment plan by allocating to optimize your portfolio assets based on your risk based on market conditions tolerance, investment goals, and economic outlook. and time horizon. 2 Risk-Adjusted Measures Use metrics like the Sharpe ratio and the Treynor ratio to evaluate a portfolio's risk-adjusted returns. 3 Diversification 4 Rebalancing Spread risk by investing in a Periodically adjust your 3 Attribution Analysis mix of different asset classes portfolio to maintain the like stocks, bonds, real estate, desired asset allocation and Break down portfolio returns to analyze the and commodities. minimize risk. Contribution of various factors such as asset allocation and security selection. Optimizing Your Portfolio for Success Asset Allocation Strategies Technology Solutions Investment Discipline Explore different Discover advanced Cultivate discipline and approaches, including portfolio management patience as key attributes strategic and dynamic software and tools to for successful portfolio asset allocation, to streamline your investment management in both bull enhance your portfolio's process and improve and bear markets. performance. decision-making. Managing Behavioral Finance Challenges Overconfidence Bias Loss Aversion Herding Effect Recognize the psychological Stay independent and avoid Avoid the trap of overestimating tendency to fear losses more than blindly following the herd, as your ability to beat the market gains and its impact on portfolio sentiment-driven decisions can and make rational investment management. harm your investment decisions. performance. Future Trends in Portfolio Management ESG Investing Artificial Intelligence Explore the growing focus on Discover how AI and machine learning Environmental, Social, and Governance are revolutionizing portfolio factors in portfolio management construction, risk assessment, and decisions. investment strategies. Quantitative Investing Alternative Investments Learn about algorithmic trading and Explore the growing popularity of quantitative models that use alternative assets like private equity, mathematical techniques to make hedge funds, and real estate in investment decisions. portfolio diversification. Monitoring and Reviewing Investments Importance of Monitoring and Reviewing Investments Regular monitoring ensures investments align with financial goals, risk tolerance, and market conditions. Reviews help identify underperforming assets and make necessary adjustments for optimal portfolio growth. Key Components of Portfolio Monitoring Reviewing Asset Allocation - Assess the distribution of investments across different asset classes to ensure diversification and manage risk Evaluating Individual Investments - Analyze the performance of each investment to determine its contribution to the overall portfolio. Methods for Performance Evaluation Best Practices for Effective Monitoring and Reviewing 1 Assessing Financial 2 Analyzing Risk and 1 Establish Clear Goals Performance Return Metrics Define specific investment objectives and milestones Examine investment returns, Consider measures such as to track progress effectively. growth rates, and standard deviation, beta, and profitability indicators to Sharpe ratio to evaluate the evaluate financial risk-return tradeoff. Utilize Technology 2 performance. Leverage advanced tools and software for accurate data analysis and portfolio monitoring. 3 Benchmarking Against Market Indices Compare portfolio performance against relevant 3 Regularly Rebalance market indices to gauge Periodically reallocate assets to maintain the desired relative success. risk-reward profile in changing market conditions.  1 2 3 4 5 6 7 OHCs Investment Process and Due Diligence Framework One Horizon Capital Investment Process and Steps Define Goals - Investment Objective – Income, Growth….. - Risk Tolerance – Low, Med, High Select Asset Classes - Bonds, Stocks, Derivatives…….. - All have their own separate risk/reward, but combined the portfolio risk/reward profile changes) – Step by step procedure to enter and successfully manage positions Due Diligence – Robust and flexible strategies that help - Long Term Fundamental Analysis (Macro, Industry and Company/Issuer specific) - Medium Term Technical Analysis (Price Trends and indicators) controls emotions of fear and greed as - Short Term Sentiment Analysis (Understand Group expectation and market pulse) the market and corporate dynamics change Caters to different trading styles – Analyse Possible Trades/Investments and Select Structure/Strategy Aggressive, Moderate , - Yield Analysis and Credit Risk for Bonds; Bullish and Bearish Trades for Equities and Derivatives Conservative - Determine Primary and Secondary Exits (What If it doesn’t go as planned) Well defined risk/reward profiles Surveillance and Trade Adjustments Market Instruments and Business Cycle Relationship Economic booms and recessions shape the performance of financial markets by influencing investor sentiment, corporate profitability, interest rates, and overall economic conditions. Understanding these dynamics is crucial for investors and policymakers in making informed decisions Cycle of Market Emotions Financial markets play a crucial role in both amplifying and dampening the effects of business cycles on the broader economy. The interactions between financial markets and the business cycle can create a feedback loop that either intensifies economic fluctuations or helps stabilize the economy. Financial markets can amplify the effects of business cycles through wealth effects, credit cycles, and investor behavior, they also play a crucial role in dampening economic fluctuations through the implementation of monetary and fiscal policies, financial innovation, automatic stabilizers, and the benefits of globalization. The effectiveness of these mechanisms depends on the appropriate calibration and coordination of economic policies and regulatory measures. Fundamental Analysis Financial Statements Valuation Methods Economic Indicators Assess a company's health Estimate the intrinsic value Evaluate the overall by analyzing its income of a stock using techniques economic conditions and statement, balance sheet, like discounted cash flow, their impact on a and cash flow statement. price-to-earnings ratio, and company's performance comparable analysis. and prospects. Technical Analysis 1 Charts & Patterns 2 Indicators & Oscillators 3 Volume Analysis Analyze price charts, support Use tools like moving averages, Study trading volumes to gauge the and resistance levels, and chart relative strength index, and strength of price movements and patterns to identify trends and stochastic oscillator to confirm identify potential reversals. make predictions. trends and generate buy/sell signals. Sentiment Analysis News & Social Media Monitor news articles, tweets, and online discussions to gauge public sentiment towards a company or sector. Sentiment Indicators Utilize sentiment indicators and sentiment analysis tools to measure market sentiment and identify investor sentiment extremes. Analyst Reports Consider the opinions and recommendations of analysts to gain insights into market expectations and sentiment. Economic Analysis 1 Macroeconomic Factors Analyze factors such as GDP growth, inflation rates, and interest rates to identify economic Monetary Policy 2 trends and their impact on investments. Assess the actions and decisions of central banks to anticipate changes in interest rates and monetary conditions. 3 Government Policies Evaluate government policies, regulations, and fiscal measures that can affect specific industries or sectors. Industry Analysis Industry Trends Competitive Analysis Industry Performance Metrics Study the current and Analyze the strengths, Assess key performance projected trends within an weaknesses, opportunities, metrics such as revenue industry, including and threats of companies growth, profitability ratios, technological within the industry to and market share to advancements, market identify the potential for evaluate the industry's demand, and competitive growth and profitability. financial health. landscape. Quantitative Analysis 1 Ratio Analysis 2 Regression Analysis Employ statistical techniques to analyze Use financial ratios like return on equity, the relationship between variables and earnings per share, and debt-to-equity make predictions about future ratio to evaluate a company's financial performance. performance and stability. 3 Portfolio Analysis Optimize your investment portfolio by assessing the risk-return trade-off of different asset classes and diversification strategies. Fixed Income Framework The purpose of the framework is to help generate robust risk/return methodology that is in line with the firm's risk tolerance levels The framework can be divided into four major stages: Determining mix by asset class: This stage determines the portfolio allocation among different geographies, industries and rating categories Selection of individual securities: This involves detailed credit analysis for potential securities within each asset class and approval / rejection by credit committee Trade execution: The chosen security is sourced at target yields (or better) from the markets Monitoring and surveillance: Regular reviews of investments and monitoring of security performance, whose results are fed back into the asset allocation process Individual Determining Security Trade Execution Asset Class Mix Selection Portfolio Monitoring & Surveillance Fixed Income (Macro Analysis) A major input into asset allocation comes from macro-economic analysis Macro/major event risks could also result in changes in exposure limits to certain geographies limits for the portfolio could be adjusted downwards in periods of high uncertainty for certain Sovereigns Lastly, certain asset classes or geographies could be excluded on regulatory concerns or sovereign stress Investments in Greece during the 2009 Crisis Macro-economic analysis will be formalized in three parts: Sovereign Credit Memo A detailed memo is prepared on each sovereign Key parameters are identified for future tracking Rating stability and regulatory framework (e.g. bail-in regimes) Economic scorecard Major macro-economic variables to be tracked (e.g. Debt / GDP) Any special parameters identified during credit review process Source of data: dealer research / rating agency websites / Bloomberg etc. Key events tracker Major political / economic data / central bank policy decision events to be tracked New issue pipeline, if available, by asset class Source of data: dealer research / rating agency websites / Bloomberg etc. Fixed Income (Security Selection) Once the portfolio mix is chosen, the next step is to select the individual securities within each asset class Credit Analysis A detailed credit memo is prepared on each security Fundamental analysis to judge default risk Rating stability for the security, including reliance on other ratings Expected return on cash and regulatory capital from the investment Liquidity / Ease of funding Major macro-economic variables to be tracked (e.g. Debt / GDP) Ensuring that the security is reasonably liquid Getting comfortable with the available funding options for the security Concentration Risk Major political / economic data / central bank policy decision events to be tracked Portfolio granularity and regional exposure limits Regulatory exposure limits, including large exposures Counterparty exposure limits Curve Steepness Keep track of the yield curve and possibility of earnings curve roll Fixed Income (Framework Summary) Curve Steepness Rating Cash required List of Approved Stability Securities Liquidity & Exposure / Funding Size / Yield Credit Leverage limits Availability Targets Analysis Investment Individual Policy Risk-return Determining metrics Security Trade Execution Asset Class Mix Selection Market Macro Portfolio Monitoring Technicals Analysis & Surveillance KPIs by asset Rating class Actions News Flow Legend Credit & Investment Risk & Monitoring Equity (Strategy Rationale) Diversification into developed market equities & fixed income (especially US), will provide enhanced risk adjusted returns Overweight US market, with the largest MktCap and most systemically important market to the global economy Though the S&P500 is at all time highs, uncertainty as to future path but US consumer spending remains strong Available ETF instruments that allow diversification into other geographies and industries without taking significant FX risk (looked for hedged ETFs) US ETFs International ETFs Emerging Market ETFs Liquidly traded market with vast amounts of research, that aid quick and efficiently due diligence on the investment Fundamental Technical Sentiment Active options market that allow Portfolios to structure well defined investments and trades with clear risk/return profiles Allows portfolio to invest in downside P&L insurance to reduce risk Can be used to lock/protect profits and still participate in upside Structure trades that can benefit in different market directs (up, down, sideways) Well defined Primary and Secondary exit points Equity (Fundamental Analysis 1/2) Long Term Point of View Average Daily Equity Volume Earnings Overall Market (at least 1mm Release Date shares/day) Fundamentals (Market indicators & Economic Growth Trends indicators) (Compared to Industry) 52 Week Range Stock Specific Analysis FUNDAMENTAL and Selection ANALYSIS Developing a watch list Intrinsic Value LT Debt to (optionable instruments) Equity Ratio (Compared to Industry) % Owned by Management Institutions (at Performance least 50%) (ROE, ROA, ROIC) Equity (Fundamental Analysis 2/2) Attempting to determine the “health” of a company and therefore refine expectation for its price behaviour Average daily volume of at least 1 million shares per day to provide liquidity in the marketplace An earnings event is a fundamental event for a company; it has the potential to dramatically affect the direction of a stock’s price Some trades are appropriate for such an event, others are not Earnings growth drives a stock’s demand and therefore its price; companies that grow their earnings should see their stock price increase accordingly Long term debt can overload a company’s ability to make a profit, especially when revenues are down Return on Equity/Asset/Invested Capital (ROE, ROA, ROIC) all help measure how well the management team is doing P/E Ratios can be thought of as what an investor is willing to pay for $1.00 of earnings PEG is a widely used indicator of a stock’s potential value Equity (Technical Analysis 1/2) Near to Mid Term Point of View Trend Lines Support and Resistance Indicators Equity (Technical Analysis 2/2) Determine the current direction of an equity; also helps determine where an equity may trade in the future Technical analysis uses tools such as up-trends, down-trends and trading ranges An up-trend is defined as a series of higher highs and higher lows. This is also called a bullish trend A down is defined as a series of lower lows and lower highs. This type of trend is also called a bearish trend A trading range is when a stock is stuck between a previous high and previous low. The stock will move up until it hits the upper end of the range. Then the stock reverses direction and heads down towards the lower end of the range Trend lines help determine levels of support and resistance. The determination of current levels and potential future levels allows you to structure trades to take advantage of possible future movement When searching for an equity to trade, consider the trend of the individual equity, the trend of the market, and the trend of the industry in which the equity resides Equity (Sentiment Analysis) Short Term Point of View Understanding Group Expectation Overall Market Expectation In recent years, the market has been driven by hype and price, without much regard for fundamental values. The market can move according to the emotion of the market participants and swing wildly in both directions. In this kind of market, it is important to gauge the emotional swings of the private sector Use several indicators to measure the emotion in the markets to get an idea of where the market may be headed VIX Level (market fear gauge) Put/Call Ratio (can indicate bullish or bearish skew for the stock/instrument) Options Traded Volume (puts/calls); short term investor sentiment can be inferred by the current option activity Open Interest (puts/calls); long term sentiment may be inferred by total option activity Equity (Economic Events) Allows us to keep our fingers on the “pulse” of the economy Labour – Employment vs. Unemployment Supply and Manufacturing Initial Unemployment Claims – weekly ISM (Institute for Supply Management) – Unemployment Report – monthly monthly ✓ Non-farm Payroll – monthly Chicago PMI ✓ Household Survey – monthly NY Empire Manufacturing Survey – monthly ADP Employment Change Philadelphia Fed Survey Challenger Job Cuts Industrial Production and Capacity Utilization – monthly Consumer Confidence Consumer Confidence Report – monthly Spending & Housing Michigan Sentiment – monthly Personal Income and Spending – monthly Overall Economic Growth Truck and Auto Sales – monthly GDP – (Quarterly report with monthly updates) ISM Services – monthly Leading Economic Indicators – monthly Retail Sales Pace of Inflation Housing Starts and Building Permits CPI (consumer price index) – monthly Core CPI – monthly, excludes food and energy PPI (producer price index) – monthly Core PPI – monthly, excludes food and energy PCE (Personal Consumption Expenditures) Core Inflation – monthly  1 2 3 4 5 6 7 Conclusion Conclusion The primary market is where securities are sold for the first time to raise capital, often through an IPO, and underwriters manage the process of issuing new securities. The secondary market is where existing securities are traded between investors on a stock exchange or over-the-counter market, and provides liquidity, diversification and price discovery opportunities. Both primary and secondary markets play a critical role in the economy, and investors benefit from having access to both. Investments play a vital role in achieving financial goals. Understanding the different types, risk and return, and factors to consider can help individuals make informed investment decisions. Risk management is essential in creating a robust investment strategy. By understanding different risks and the risk-return tradeoff, investors can make informed decisions and protect their investments.  www. onehorizoncapital.com Email: gabrielodediran@ onehorizoncapital.com Telephone Number: +234808-715-0646